Ice I am going to paste part of an article that explains a lot. Bottom line is that in cash accounts the stock broker has to have possession of the stock. In a margin account where someone is shorting then they are basically borrowing shares from the broker. In theory this is great but a lot of brokers will allow you to short without having the stocks themselves. This is why illegal shorting can be so damaging to a young start-up. One of the best cases to study on this would be the Overstock.com case. Shorters drove the stock price down to nothing almost destroying the company. If everyone is holding stock in a cash account the transfer agent can account for all the shares. Despite previous discussions there are some things companies can do to help prevent damaging shorting. Here is the article:
The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a rule instituted by the Federal Reserve Board. This rule is motivated by the nature of the short sale transaction itself and the potential risks that come with short selling.
Under Regulation T, it is mandatory for short trades that 150% of the value of the position at the time the short is created be held in a margin account. This 150% is comprised of the full value of the short (100%), plus an additional margin requirement of 50% or half the value of the position. (The margin requirement for a long position is also 50%.) For example, if you were to short a stock and the position had a value of $20,000, you would be required to have the $20,000 that came from the short sale plus an additional $10,000, for a total of $30,000, in the account to meet the requirements of Regulation T.
The reason you need to open a margin account to short sell stocks is that shorting is basically selling something you do not own. As the short investor, you are borrowing shares from another investor or a brokerage firm and selling it in the market. This involves risk, as you are required to return the shares at some point in the future, which creates a liability or a debt for you. It is important for you to bear in mind that it's possible for you to end up owing more money than you initially received in the short sale if the shorted security moves up by a large amount. In such a situation, you may not be financially able to return the shares. Therefore, margin requirements are essentially a form of collateral, which backs the position and reasonably ensures that the shares will be returned in the future.
Here is another short clip:
In a short sale, an investor sells a share of stock he does not own and profits when the price of the stock declines. A peculiar feature of short sales is the apparent increase in the number of shares of stock beneficially held by investors over and above the actual number of shares issued by the corporation. It has previously been noted that this may create problems in the
execution of proxy votes. In this paper we illustrate a related problem in the prosecution of claims of securities fraud. We examine this problem using the recent case of Computer Learning
Centers, Inc., (CLC) in which the number of short sales was extreme
ly large.
I am going to post another detailed report on counterfeiting stock as well.
